United States v. Smith

155 F.3d 1051 (9th Cir. 1998)

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Nature of the Case

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Facts

PDA Engineering, Inc.'s shares were publicly traded on the NASDAQ. D was PDA's Vice President for North American Sales and worked in PDA's Nashville, Tennessee, office. D had accumulated 51,445 shares of PDA stock. From his position at PDA, D learned that future earnings were going to be bad. Between June 10 and June 18, 1993, D liquidated his entire position in PDA and shorted an additional 25,000 shares on July 8, and another 10,000 shares on July 20. D's parents also sold and sold short a total of 12,000 shares. The SEC eventually discovered the sales from an anonymous informant. D was indicted on eleven counts of insider trading in violation of §10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and on one count of obstruction of justice in violation of 18 U.S.C. § 1505. The district court instructed the jury as follows: In order for you to find the defendant guilty on [the insider trading counts] of the indictment, the government must prove a causal relationship between the material nonpublic information in the defendant's possession and the defendant's trading. The government must prove that the defendant sold or sold short PDA stock because of material nonpublic information that he knowingly possessed. It is enough if the government proves that such inside information was a significant factor in defendant's decision to sell or sell short PDA stock. D was found guilty and appealed. D contends that the information upon which he traded consisted of 'forecasts of future sales and revenue.' This 'soft,' forward-looking information, he insists, cannot, as a matter of law, constitute 'material' information within the meaning of Rule 10b-5 and, consequently, cannot give rise to insider trading liability.